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Yahoo Looks To Regain Its Cool With $1.1 Billion Tumblr Deal

Yahoo CEO Marissa Mayer speaks about the company’s acquisition of Tumblr at a press conference in Times Square on May 20, 2013 in New York City. The internet giant Yahoo purchased the blogging site Tumblr for $1.1 billion. Mayer also announced a sleek new redesign of Yahoo’s Flickr photo service. (Mario Tama/Getty Images)

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SUNNYVALE (CBS/AP) — After falling woefully out of fashion, Yahoo wants to be cool again while catering to the capitalistic demands of its shareholders. That goal led CEO Marissa Mayer to make a $1.1 billion bet on online blogging forum Tumblr in a risky acquisition that revolves around the vision and instincts of a 26-year-old entrepreneur who dropped out of high school to pursue his dream of bringing more beauty and creativity to the Internet.

The deal announced Monday is Mayer’s boldest move since she left Google 10 months ago to lead Yahoo’s latest comeback attempt. It marks Yahoo’s most expensive acquisition since it bought online search engine Overture a decade ago for $1.3 billion.

While hailing Tumblr as a fount of creativity that attracts 300 million visitors each month, Mayer told analysts Monday that she is “making a sincere promise to not screw it up.” Yahoo said its founder, David Karp, will remain in charge and will keep Tumblr’s headquarters in New York to retain the same “irreverence, wit and commitment to empower creators.”

Tumblr’s audience, which boasts a large concentration of teens and people in their early 20s, is already fretting that the service is going to become more stodgy and commercial under the ownership of an 18-year-old company that seems ancient by Internet standards. Advertising largely has been a missing ingredient so far as Tumblr, like many online services in their early stages, focused on building a loyal audience before turning its attention to making money. By purchasing Tumblr, Yahoo will have more opportunities to sell ads.

“I can’t help but be concerned that Yahoo will `Yahooize’ Tumblr and make it as irrelevant as the mother ship,” said Jennifer Grant, 36, who has a Tumblr blog.

Founded in 2007, Tumblr emerged as a trendy online hangout by providing a blogging service that makes it easy to share posts, photos, video and other content in an enthralling mosaic of interlocking information. Tumblr forums are devoted to such diverse topics as art, architecture, food, politics, pets and fashion.

Although there are several competing services for people to blog, Tumblr makes it easy to create, discover and share content. Tumblr users rely on a dashboard to pinpoint the kinds of blogs that they want to track. Tools help users pass along posts that interest them.

The service says it has amassed more than 50 billion posts from 108 million blogs, with some 75 million new posts every day. More than half of Tumblr’s users connect through its mobile app and engage in an average of seven visits per day.

Mayer is betting that Tumblr will provide Yahoo with a captivating hook to reel in more traffic and advertisers on smartphones and tablet computers. That rapidly growing market is expected to become even more important during the next decade as people increasingly consume digital content on mobile devices instead of laptop and desktop machines.

Tumblr could also help Yahoo recapture some of its cachet with teens and adults in their early 20s, a demographic that has become tougher for Yahoo to reach in recent years as it fell behind the technological curve and struggled to develop compelling services.

While Facebook has turned into a mainstream social network where even grandparents now connect family and friends, Tumblr has become one of the places where the cool kids hang out.

But Yahoo will have to manage Tumblr’s next stage carefully to avoid driving away the Web surfers and mobile device users that had made Tumblr such an enticing takeover target.

Micah Gray, 22, a Tumblr user who lives in Denver, likened Yahoo to an old, rich uncle who shows up to a high school or college party and hops into the hot tub to the disgust of almost everyone else there. But “the owner of the house you’re partying at sold the rights of the hot tub to him and he can use it whenever he wants and bring his other old, rich friends,” Gray said.

On the other hand, investors will want to see results from the $1.1 billion price tag. Yahoo is paying mostly cash for Tumblr, dipping into what remains of a $7.6 billion windfall reaped last year from selling about half of its stake in Chinese Internet company Alibaba. Taking over Tumblr will devour about one-fifth of the $5.4 billion in cash that Yahoo had at the end of March.

Mayer is confident she can balance the needs of Tumblr’s users and Yahoo’s investors.

The deal overshadowed Yahoo’s previously scheduled announcement on changes to its Flickr photo-sharing service, including a boost in the amount of free storage to 1 terabyte, far more than what rivals offer. Like Tumblr, Yahoo got the photo service by buying a promising startup.

Mayer called Tumblr a “game changer” during a conference call with analysts and was effusive in her praise of Karp during an interview with The Associated Press. She likened him to other great entrepreneurs she knows—a list that includes Google co-founders Larry Page and Sergey Brin, a duo for which she worked for 13 years.

Karp, who built Tumblr from his tiny childhood bedroom in New York, “will be one the legends of his generation in terms of an entrepreneur who has really changed the way people express themselves,” Mayer predicted.

If Mayer wasn’t running Yahoo, Karp said he probably wouldn’t have agreed to sell Tumblr. Karp and Mayer began to talk late last year, when Tumblr was looking into ways to show ads that fit in well with the rest of its content. Those discussions morphed into Tumblr selling all or part of itself. Other interested suitors are believed to include Google, Microsoft Corp. and Facebook.

Mayer’s enthusiasm, a promise of independence and Yahoo’s rich offer won over Karp.

“Marissa is the real deal,” Karp said in a Monday interview. “Marissa is going to be in the trenches standing next to me while we build this thing.”

The deal is expected to close by the end of the year. Yahoo isn’t counting on Tumblr producing significant revenue until next year. Tumblr’s 175 employees, including Karp, will join Yahoo.

Mayer and Karp believe Yahoo and Tumblr can complement each other. Tumblr can draw upon Yahoo’s search engine to help users find things that interest them. Meanwhile, Tumblr’s wealth of content could be interwoven into Yahoo’s other services, including those that provide coverage of general news, sports, finance and entertainment.

Tumblr may help define Mayer’s legacy at Yahoo. Since coming to Yahoo, Mayer has concentrated on improving employee morale, redesigning services and bringing in more engineering talent through a series of small acquisitions that have collectively cost less than $50 million.

As popular as Tumblr has become, the service remains unprofitable. That already has analysts questioning whether Yahoo paid too much in Mayer’s zeal to gain control of a hot service.

Mayer’s efforts at Yahoo have been well-received on Wall Street so far, although analysts say most of the 70 percent surge in Yahoo’s stock price under Mayer’s leadership has been driven by the rising value of Yahoo’s remaining 24 percent stake in Alibaba. When Alibaba goes public within the next few years, analysts have estimated that Yahoo could collect another $10 billion to $20 billion by selling the rest of its Alibaba stock.

If this deal pays off the way Mayer envisions, Tumblr could help Yahoo finally get its stock price to $33. That would be a major coup because many investors soured on Yahoo after a previous regime led by co-founder Jerry Yang squandered an opportunity five years ago to sell the Sunnyvale, Calif., company to Microsoft for $33 per share. The stock spent more than four years trading below $20 before the surge in recent months. The shares added 6 cents Monday to close at $26.58.

Tumblr also will fill Yahoo’s gaping void in social media. Yahoo so far has had to connect its services to Facebook and Twitter to give its users a social networking outlet.

Having its own social networking service will give Yahoo more insights into the things that people like—a key to distributing ads to consumers most likely to be interested in specific products. That data, in turn, should help Yahoo sell more ads and accelerate its revenue growth. After three successive years of declines, Yahoo’s revenue rose slightly last year, but lagged far behind the growth at Google and Facebook. Mayer has vowed to bring Yahoo’s revenue growth back to at least the level of the overall Internet ad market.

The deal also has some symbolic significance for Yahoo after spending much of the past decade aimlessly drifting under different management teams while Google overtook it in terms of size and influence. At the same time, newcomers such as Facebook Inc. and Twitter began to command the attention of people who found themselves spending less and less time on Yahoo.

Part of Yahoo’s problems stemmed from missed chances to improve its service and technology.

Yahoo flirted with buying Google and Facebook in their early days, only to have the talks unravel because Yahoo wasn’t prepared to pay asking prices that were far below the current market values of $300 billion for Google and $62 billion for Facebook. Yahoo also considered buying YouTube in 2006, only to be outbid by Google, which snapped up the world’s leading video-sharing service for $1.76 billion—a price that now looks like a bargain.

Karp’s estimated cut from the Tumblr sale will range from $250 million to $300 million. He dropped out of high school to concentrate on computer programming and ended up being home schooled while taking classes in Japanese and working on gambling software. Later, he became a product executive at the parenting website UrbanBaby. After CNet bought the site in 2006, Karp set up his own development service called “Davidville” before deciding to create an outlet for personal expression—an endeavor that hatched Tumblr.

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